Standing Committee D

[John Bercow in the Chair]

Clause 158

Duty to promote the success of the company

Amendment proposed [this day]: No. 40, in clause 158, page 70, line 7, after ‘faith’, insert
‘and as appropriate for the size of the company’.—[Mr. Djanogly.]

John Bercow: I remind the Committee that with this we are discussing the following: Amendment No. 39, in clause 158, page 70, line 9, leave out from ‘whole,’ to end of line and insert
‘having regard, insofar as he considers it relevant, to the following factors (amongst others)—’.
Amendment No. 300, in clause 158, page 70, line 9, leave out from ‘so’ to end of line 18 and insert ‘must endeavour to—
(a) have regard to the likely consequences of any decision in the long term,
(b) promote the interests of the company’s employees,
(c) foster the company’s business relationships with suppliers, customers and others,
(d) minimise any adverse impact of the company’s operations on the community and the environment,
(e) maintain a reputation for high standards of business conduct, and
(f) act fairly as between members of the company.’.
Amendment No. 166, in clause 158, page 70, line 9, after to , insert
‘what he considers, in good faith, to be’.
Amendment No. 297, in clause 158, page 70, line 14, leave out and the environment’.
Amendment No. 41, in clause 158, page 70, line 18, at end insert ‘, and
(g) all other common law duties of directors.’.
Amendment No. 42, in clause 158, page 70, line 25, at end insert—
‘(4) The duties implied by this section shall not apply to small and medium sized companies.’.
Amendment No. 43, in clause 158, page 70, line 25, at end insert—
‘(4) None of the duties set out in or implied by this section shall take priority over any of the other duties.’.
Amendment No. 165, in clause 158, page 70, line 25, at end insert—
‘(4) The duty to promote the success of the company shall be paramount.’.
Amendment No. 417, in clause 158, page 70, line 25, at end add—
‘(4) The Secretary of State must issue a non-statutory set of guidelines concerning the application of this section, which must be updated annually.’.
Clause stand part.
New clause 1—Directors to have regard to interests of employees—
‘(1) The matters to which the directors of a company are to have regard in the performance of their functions include the interests of the company’s employees in general, as well as the interests of its members.
(2) Accordingly, the duty imposed by this section on the directors is owed by them to the company (and the company alone) and is enforceable in the same way as any other fiduciary duty owed to a company by its directors.
(3) This section applies to shadow directors as it does to directors.’.
New clause 27—Guidance on interpretation of directors’ duties—
‘(1) The Secretary of State shall from time to time publish binding statutory guidance as to the interpretation of the duties imposed on directors by section 158.
(2) Before publishing the guidance referred to in subsection (1), the Secretary of State shall consult such persons or bodies as he considers relevant.’.

Margaret Hodge: In the hope of making some progress, I shall keep my comments brief. The subject was debated for a long time in the House of Lords and Opposition Members there said that the clause as drafted is the right way forward.

Jonathan Djanogly: Did they?

Margaret Hodge: Yes, they did. If the hon. Gentleman wants the reference, I shall find it for him. It is at column 849.

James Brokenshire: Date?

Margaret Hodge: It is 9 May 2006—

Jonathan Djanogly: Third Reading?

Margaret Hodge: On Report. Lord Freeman said that
“we believe that the Government's amendment is the right way forward.”
He said it twice because he also said that
“we believe that Amendment No. 79 is the right way forward.”—[Official Report, House of Lords, 9 May 2006; Vol. 671, c. 849.]
Furthermore—[Interruption.] I cannot help the hon. Gentleman with that. [Interruption.]

John Bercow: Order. I like to preserve reasonable informality in our proceedings, but we cannot have debate conducted by chuntering from a sedentary position. I say that with no discourtesy to the hon. Member for Huntingdon (Mr. Djanogly), but it is better to try to preserve formality.

Margaret Hodge: I will send the hon. Gentleman a copy of the Hansard that I am quoting.

Jonathan Djanogly: The Minister stood up to make a point. I am not sure what it was but I think that it was about the Conservative party changing its tune or tabling an amendment, but she cannot say which one or, precisely, what it was about. Perhaps she will express her point. We may then be able to respond to it.

Margaret Hodge: In the House of Lords, Lord Freeman, on behalf of the Conservative party, said that he was satisfied that the range of amendments that had been passed brought together all the concerns that Conservative Members there had raised about the original framing of the clause. By the time the House of Lords reached the clause, there was consensus on it. That is my point. That consensus now appears to have disappeared in the House of Commons. It related to the central theme of how to bring together company success with wider social and economic concerns.
I want to make some points of principle about the clause and then to deal with some of the issues in detail. A point of principle is that the clause should not be seen on its own but with the clauses on narrative reporting that we shall discuss later. It should also been seen in the context of wider rights for shareholders, including amendments that I tabled today on the rights of indirect shareholders. I discussed those informally with members of both Opposition parties yesterday and believe that we have reached a consensus on that with all stakeholders. With the new narrative reporting requirements and by widening the access for shareholder participation, the clause will make a difference. That is why we are introducing it.
Another point of principle is that, as I have increasingly acknowledged during the eight or nine years that we have been in government, law of itself will not transform the culture of companies. It will not suddenly create a culture whereby companies take on the social responsibility to which hon. Members alluded. The law can, however, provide a support framework that will lead to a transformation in culture. 
That leads me on to the contribution of my hon. Friend the Member for Bedford (Patrick Hall). I shall return to his proposals and amendment in detail, but he suggested that we adopt a more pluralist framework. He felt that we relied too much on what he called the voluntary framework. I share his goals, and the argument is about the best means of achieving them. Like the hon. Member for Huntingdon, I believe that our company law framework needs to ensure that we maintain the UK’s standing as a good place in which to form and retain businesses. I often talk about the promiscuity of capital, and it will place itself somewhere else in the world if we do not have a business-friendly environment that provides the conditions for effective business management and expansion.
That is why we must keep in mind the Bill’s core purpose: providing clarity to business about the objectives of business. Hence the duties in the proposals before us. We cannot diminish the core purpose of business, but Labour Members believe it can carry out that purpose effectively only if it has regard to the wider community’s interests.
The Bill takes a huge step forward in trying to align corporate social responsibility with business efficiency and prosperity. It is a real step change, and I hope that all hon. Members see it that way. To find corporate social responsibility, we must look elsewhere. The biggest advances in proper regard for employees are found in health and safety legislation, not company law. We must consider that with regard to the impact of businesses on the environment and the long-term impact of businesses on their communities. CO2 emissions are being discussed in the statement by my right hon. Friend the Secretary of State for Trade and Industry on the Floor of the House.
Our actions internationally, through Organisation for Economic Co-operation and Development guidelines, the industry transparency initiative that the Prime Minister launched and the round table on sustainability, will be a key factor in taking forward Labour Members’ ambitions to protect the environment for the long term and ensure that companies, when pursuing their interests, do not damage community interests or the environmental interests of communities elsewhere.
The Bill attempts to open up companies to much more public account. Whether through indirect shareholder interest or the voting of institutional shareholders, it will begin to open up the actions of companies to public account. In so doing, those actions could transform consumer behaviour and determine whether consumers invest in or buy products from particular companies. If and when people do so, we will pursue cultural change. That is the route down which we wish to travel. We want to create a framework to facilitate the cultural change that meets the aspirations of many Members, in particular Labour Members.
The issue under discussion is one of the most serious in the Bill. I was disappointed by the contribution of the hon. Member for Huntingdon. I had hoped that I could reply seriously to it, but at the end of the hour it was difficult to find anything that genuinely warranted a serious response. We can all quote lawyers and commentators, and as he did, and I thought of jokes along the lines of “How many lawyers does it take to change a light bulb?” However, I shall give the hon. Gentleman just one quote. It is from another eminent QC who said in a letter in the Financial Times—he quoted one and I am quoting another—that the
“provisions are no threat to the practical running of companies in the UK”.
The letter continued:
“Of the companies directors I see, those worth their salt already have regard to all of these factors and more.”
Quoting one set of lawyers does not help us. As the hon. Member for Grantham and Stamford (Mr. Davies) said, 50 per cent. of lawyers think one way and 50 per cent. think the other.
In my view there is an essential dishonesty in the argument that the hon. Member for Huntingdon attempted to make. On one hand, he said that he favours corporate social responsibility, which is an advance and we welcome that. On the other hand, he predicts that stating in statute that companies should have regard to corporate responsibility factors in carrying out their key duty to pursue their interests spells possible disaster. The purport of his argument was that that would lead to endless litigation. I left it to the hon. Member for Cambridge (David Howarth)—he is a lawyer and I am not—to destroy that argument. The hon. Member for Huntingdon argued that the provision could end in huge costs or wipe out any benefits from our deregulation. That was a dishonest argument.
On one hand, the hon. Gentleman supports the proposition of corporate responsibility. On the other, he rejects it. On one hand he claims—

Jonathan Djanogly: Will the Minister explain why my argument was dishonest? [Interruption.]

Margaret Hodge: Hon. Members might call it contradictory and I thought of using that word, but it is dishonest to pretend to support the concept of corporate responsibility and then refuse to see that taken forward in action. It is one thing to voice support for a set of policies and another to take it forward.

Paul Farrelly: It is a disingenuous argument.

Margaret Hodge: Disingenuous or contradictory—people can choose.

Crispin Blunt: For a stalwart of new Labour to start chucking around terms like “dishonest” is perhaps unwise. I hope that the right hon. Lady will settle for disingenuous.

Margaret Hodge: I note the hon. Gentleman’s preference for that word. I thought long and hard about the matter and had three hours during lunch in which to do so. Hon. Members may choose the interpretation they want.

Patrick Hall: I am not going to dispense advice on which word should be used. What matters is how people vote in this place and the other place. When it comes to where a party stands on enlightened shareholder values and corporate social responsibility, we had a clear indication of where the Conservative party stands from the way that it voted in the other place. Perhaps it would help if the hon. Member for Huntingdon said whether he intends to follow the line taken by his colleagues in the other place. That would be not honest or dishonest, just clear.

Jonathan Djanogly: I started by saying—

John Bercow: Order. We cannot have an intervention on an intervention. It is necessary for the Minister to respond to the intervention by the hon. Member for Bedford before any further interventions can be taken. Before the right hon. Lady resumes her remarks, let me also say that there has been no breach of order. It is perfectly in order to describe an argument as dishonest, but not in order to describe another right hon. or hon. Member as dishonest. However, I hope that we are not going to have an endless and circuitous semantic exchange.

Margaret Hodge: Thank you for that clarification, Mr. Bercow. I was extremely careful in the comment that I made. I simply note that the hon. Member for Reigate (Mr. Blunt) accepted that the remark by the hon. Member for Huntingdon was at least disingenuous.

Crispin Blunt: No, I do not accept that at all. I am grateful to the Minister for allowing me to make that point, but she was very ill advised to start chucking around the term “dishonest”. There are other ways to describe such things, which are slightly less offensive and would better sustain the Committee’s good spirit.

Margaret Hodge: It was in an attempt to return to that good spirit that I just had to get that in.
Opposition Members must ask themselves how one can support a proposition on the one hand but reject it on the other. How can one claim to promote corporate social responsibility on the one hand, but denounce it on the other? As my hon. Friend the Member for Bedford said, this morning’s debate on corporate social responsibility exposed the inconsistency and the central weakness of the Conservative party. By opposing this part of the Bill, the hon. Member for Huntingdon shows that the Conservative party’s language might have altered, but that its actions remain the same. At the end of the day, it is not what you say in politics that counts, but what you do.
The hon. Gentleman made a very long contribution, and I am not saying that it did not warrant serious consideration, but I interpreted it to mean that business interests had to stand untrammelled by any other public interest, be it the interest of the community, the environment or employees.

Jonathan Djanogly: Will the Minister give way?

Margaret Hodge: No, the hon. Gentleman might like to hear this point. The Conservative party, in taking the position that it has, is setting itself against Britain’s best and most highly successful businesses, and their leaders, who tell us that the way that we propose is the future for business.
The hon. Gentleman talked about the clause clouding the law, but he is clouding his view and his genuine purpose in this series of amendments. He does not think that companies have responsibilities to the long term, the community, the environment or their suppliers.
Let me acknowledge the contribution of the hon. Member for Cambridge. When he started, I said, “Oh dear,” because he was going to give us a legal thing. Of course, because I love company law, I meant to say, “Hurray!” I very much agree with what he said about litigation, and it is likely to be extremely rare. We do not expect the clause to give rise to significant litigation, just as cases under current case law have been very rare. However, the clause is important, because although most directors might already pay regard to the factors mentioned, it is important that they consider them in thinking about how best to promote the company’s success.
It is important that I briefly take Members through where we are on the clause and why, I am afraid, we must reject all the amendments. I wish to set out how we responded in another place to some uncertainties and misunderstandings about the meaning of the clause. Its title is “Duty to promote the success of the company”, which is the right title to describe the duty. It is not a pluralist duty, which was the other route that we could have taken.
Directors are required to have regard to the factors laid out when promoting the success of a company for the benefit of its members, but if a director puts one of those factors ahead of his overarching duty to promote the success of the company, he acts in breach of that duty to the company.
In another place, the clause was amended to bring together what are now its subsections and make even clearer—I hope to hon. Members, and certainly to those outside who will have to use the law—our intention that while a director must have regard to the various factors stated, that requirement is subordinate to the overriding duty to promote the success of the company.
We had further discussions with business and other stakeholders, and re-tabled a Government amendment to delete from the clause a second “must”, which we considered could be perceived as creating a separate duty. Its deletion does not affect the obligation to have regard to the factors, but it makes it even clearer that clause 158(1) is a single proposition.
We believe that a director should be required to give proper consideration to the list of factors, so far as it is relevant to the decisions that he is taking. That is the essence of enlightened shareholder value. At the same time, a director will not be required to consider any of the factors beyond the point at which to do so would conflict with the overarching duty to promote the success of the company. That would clearly not be helpful or sensible.
In another place, another Government amendment was accepted to delete the words “so far as reasonably practical”. We tabled that amendment for a purpose. The words were originally intended to have a dual effect, operating as a limit on what is required of directors and making clearer the fact that directors are required to do more than pay lip service to the factors in the clause. It became clear during the debate, in which we listened, that there was uncertainty about the effect of the words. That was why we chose to delete them.
I also wish to draw to the attention of hon. Members the issue of good faith business judgment. We believe it essential for the weight given to any factor to be a matter for a director’s good faith judgment. Importantly, the decision is not subject to the reasonableness test that appears in other legislation.
As now, the courts will not be able to apply such a test to a director’s business decisions. That is in sharp contrast to, for example, decisions on public law, to which the courts often apply such a test. We are trying to achieve the effect that a director must give such consideration to the factors identified as is necessary for the decision that he must take. We do not intend a director to be required to do more than apply good faith and, as elsewhere in the Bill, the duty of care and skill is an important ingredient. Nor do we want it to be possible for a director to be held liable for a process failure that does not affect the outcome.
The clause does not impose a requirement on directors to keep records, as some people have suggested, in any circumstances in which they would not have to do so now. That is an important point, because companies might wish to record their decision-making process in respect of key business decisions, but nothing is gained by a box-ticking mentality that records information without proper reason.

Jonathan Djanogly: Does the Minister not appreciate that almost every commentator writing on the provision says that that is exactly what will happen? It will bring in a box-ticking mentality, with boards having to jump through hoops to justify their thought processes.

Margaret Hodge: No, I do not accept that, and I refer the hon. Gentleman to the contribution made on that point in another place by the Attorney-General. That issue was raised in the debate on that clause by their lordships. All I can do is to reiterate that we do not believe that the clause will end up with an expensive paper trail, which is what the hon. Gentleman has suggested. The reason for that is how the law will work.
The company will have to bring a claim against the director for a breach of his or her duties under the clause, and would need to show that the director had not had regard to one or more of the factors. There is no reason to believe that a director would have to provide written evidence proving that in taking a particular decision he or she had had regard to those factors. That evidence would not be required for him or her to defend themselves against such an action.

Jonathan Djanogly: Is not the problem that when a company takes advice on how it can best show that it has complied with the clause, it will be told to put it in writing?

Margaret Hodge: The onus will be on the company to prove that the director has not complied, rather than on the director to show that he has. Because the onus lies with the company, rather than the director, the hon. Gentleman’s fears are not justified.

Quentin Davies: Does the right hon. Lady accept that she has just given the very important assurance that, in her view, the Bill will not require directors to keep further records than those they do currently? In the event of that issue coming up in court, under the Pepper v. Hart rule, her statement this afternoon could be prayed in aid by the director concerned. So, she has just given the Committee a very important assurance, of which we should all be aware.

Margaret Hodge: It was for that reason that I chose to emphasise that point. Clearly, companies need to keep records of their appropriate decision making, but in our view no further burden is required by that particular duty. That is the point that I was trying to make. Obviously, there is a general need to provide effective records. All that the clause does is give fuller expression than is currently in the law, but it should not require further record keeping.
The six factors discussed emerged from the company law review process, but because we know that they might change over time, we said that the list is not exhaustive, which is why “amongst other matters” has been inserted in clause 158. The insertion of those words in no way detracts from the obligation to have regard to the listed factors, but leaves it open. As I have said, the duty cannot be considered in isolation.
That was a quick run through of the general view of the clause, which it was important to put on the record. Let me now deal quickly with the amendments as best I can. On amendments Nos. 40 and 42, which concern the size of a company, a director has a duty, whatever the size of the company, not to put his or her own interests ahead of those of the company. That is as true of a small or medium-sized company as it is of a larger quoted company. The company would suffer a loss in just the same way, whatever its size. So, in our view, those duties should not be different for directors of smaller companies. I am trying to keep my answers as short as I can. I hope that I have answered that question, but if I have not, I am happy to return to it.
On amendment No. 300, which my hon. Friend the Member for Bedford tabled, I am afraid that we think that the phrase “endeavour to” instead of “have regard to” brings a stronger pluralist approach. It might not have been his intent but it is the effect of those words in law. There would be confusion over the duties and there might well be competing duties. That is the argument against the pluralist approach to the directors’ duties framework that we are attempting to establish, and on that basis we do not wish to accept the amendment. It is a “have your cake and eat it” amendment and while ingenious, in that requirements are not quite spelled out in the traditional way, the impact would be such. I sadly must therefore reject the proposals.
The way in which we have framed the clause and brought it together with the narrative reporting clauses, and the opening up to public account through shareholder engagement, which pervades the Bill, will begin to have a massive impact on the corporate social responsibility agenda.
Our view on amendment No. 166 is simply that it is not necessary. We do not intend a director to be required to do more in having regard to the factors than acting in good faith and in accordance with the duty of care and skill. It will, for example, be for the director to make a judgment on the likely longer-term consequences of his decisions in good faith and in compliance with his duty to exercise reasonable care, skill and diligence.
The hon. Member for Grantham and Stamford sought to probe us by suggesting that we leave out the word “environment”. I have a long quotation, which I can come back to if he is not listening at this moment. [Interruption.] I am addressing his amendment No. 297; I do not know whether he wishes to listen to my response on it.

Quentin Davies: Of course I wish to listen to the response. I am sorry, but the calls of Whips are difficult to resist.

Margaret Hodge: I got the hon. Gentleman’s constituency right. He said that his amendment was designed to probe our thinking a little. Incorporating the concept of the environment into the list of factors came out of the consideration of those factors by the company law review, and I have many quotations in that regard.
I shall suggest to the hon. Gentleman three good reasons why we would want to cover the environment. First, people care passionately about the environment. That might not be something that he shares, but it was considered by most of the people who participated in the company law review process to be one of the key issues of interest. Secondly, in recent years, we have seen the devastating evidence of the impact on the environment of the action of companies, be they large or small, although the hon. Gentleman elected to focus on a small company’s contribution.
Thirdly, the company’s impact on the environment can be a direct route to financial success, and that is shown by the growing number of members of the Environmental Industries Commission. As the Prime Minister has made clear on a number of occasions, we want Britain to be a leading player in the green industrial revolution.

Quentin Davies: I am grateful to the right hon. Lady for those comments. As I explained this morning, the object of my tabling this probing amendment was to get the Government to think about the matter and to come up with a reasoned response. We have now had that.
The right hon. Lady’s first reason, that people feel strongly about something, is not a good reason for law making. I feel strongly about the environment; I gave an answer on the radio this morning in which I said that I thought that global warming was the most important medium and long-term problem facing the human race, together with nuclear proliferation. However, that is not a good reason for imposing one’s feelings or prejudices on others by law making. The provision should be excluded. The argument that it may be good for companies to be environmentally conscious corresponds exactly to the decision that the director should take anyway under clause 158. They should take strategic decisions in the interests of the company.
It has been an interesting discussion, but I can give the Minister the assurance she looks for: I shall not press the amendment to a vote.

Margaret Hodge: I shall deal with the other amendments.
Amendment No. 41 is curious and we cannot support it. It is unnecessary, partly because it fails to distinguish duties with which a director must comply and matters to which they must have regard in fulfilling their duties, and again, the list is not exhaustive.
Amendments Nos. 43 and 165 are also misconceived. They appear to take the view that clause 158 imposes several different and potentially contradictory duties. However, we have been clear that it is not a question of a hierarchy of duties. One duty is enunciated, and in carrying it out, directors must have regard to the factors. We have said that a number of times. Amendment No. 165 would create a hierarchy, which we do not understand.
I turn to amendment No. 417, and to new clause 27, which is about the publication of statutory and non-statutory guidance. We have said that we will publish non-statutory guidance, so I was amused by that discussion. The purpose of non-statutory guidance and legislation generally is to help people—in this case, companies—obtain a better understanding and interpretation of legal provisions, not to create problems. We will publish the guidance in that regard. It does not need annual renewal and review, so we will not agree to the proposal. We intend to publish non-statutory guidance, which I am afraid does not meet the desires of my hon. Friend the Member for Bedford.
The new clause would re-impose a section of the Companies Act 1985, which we have discussed extensively. The most helpful thing I can do is quote from the company law review:
“There is nevertheless considerable evidence that the effect of the law is not well recognised and understood. This may be in part because the relevant principles are not enacted”—
hence, we are legislating for them today—
“but have to be derived from quite extensive case law, developed over 250 years and rooted in the eighteenth century law of trusts.”
The relevant part of the quotation says:
“The situation is also complicated by the statutory redefinition (or extension) of the directors’ core duty in what is now section 309 of the”—
1985—
“Act.”
The amendment is a curiosity. I take it as a probing amendment more than anything else, especially if one considers it alongside other amendments. If the hon. Member for Huntingdon accepts that, I shall not pursue it.
We have had a long discussion, and hon. Members want to discuss other key matters. It has been a good debate, but I hope that at the end of the day people who support the purpose of corporate social responsibility and do not see any conflict between it and the long-term interests of companies, which in themselves create the wealth that is so important to our nation, will vote with us and not pursue any amendment in any hon. Member’s name.

Jonathan Djanogly: First, the Minister cited amendment No. 78 and mentioned that our noble Friends supported the clause She is simply wrong. Amendment No. 78 in the House of Lords proposed replacing the words from “act” in the first line with
“in good faith in what he considers to be in the interests of the company”.
That is basically just reasserting existing law and deleting the list of directors’ responsibilities in its entirety. The hon. Member for Bedford was correct. That is what the Lords did and it is not what the Minister said. However, the hon. Gentleman seemed to have missed the fact that I started off the debate today by saying that that is what our noble Friends did and I had to decide whether simply to follow their line or to take a more constructive line of amending the clause to make it more acceptable. That is a point of clarification.
I appreciate that the Government are being pulled in various directions, but this is a situation of their own making. I highlighted the technical problems with the codification of directors’ duties, which many have pointed out. I quoted many commentators who believe that the provisions have real implications for companies. To that extent, whatever view one takes of the clause, the Minister went rather over the top in her denunciation of my approach, which is shared by many other people.
We believe that this is important. By using the “one size fits all” approach, the Government will be tarring the corner shop with the same brush as the multinational. That has the potential to hinder the growth of businesses and UK plc. By attempting to codify the common law duties of a director in statute, the Government have introduced language that almost every corporate law firm that has contacted us has said will lead to greater uncertainty and confusion—the exact opposite of what the Minister said she wants from the clause.
On a rather simplistic level, the Government argue that it would be easier for company directors to refer to a statute than a great amount of case law. However, by putting directors’ duties into rigid statute, a great deal of the flexibility of the common law system will be lost. The Government inevitably end up cherry-picking those items that they think should go into their list, which will in itself lead to uncertainty and lack of clarity. They have also sewn confusion in the debate by maintaining that they do not intend to change the common law while at the same time introducing the concept of enlightened shareholder value. All commentators seem to note that there is a change in the common law position, and the Government should accept that.
There is the old adage that one should always expect the unexpected. That certainly applies to the hon. Member for Cambridge. He made the case that the clause is unlikely to lead to many court cases in practice. I do not think that he is necessarily correct. Clearly the broad spectrum of City lawyers who have been commenting would disagree with him—but that in itself is a debatable issue. Even if he were right, the fact that not many people are to be sued does not justify the clause. He then argued that the clause would protect directors. Again, if there is credence to his argument it is because the change in the law will so muddy the waters that people will be put off going to court.

David Howarth: That is even better.

Jonathan Djanogly: Perhaps, but we are looking for a degree of certainty in the Bill.
The hon. Member for Bedford advocated his separate approach in his informed speech. He was confused as to how the Conservatives could support corporate social responsibility but at the same time query enlightened shareholder value. CSR does not need strict definition in an area which does not need definition. What could be a huge effort of presentation of CSR for a small company could be a small effort and not doing much for a large company.

Patrick Hall: The hon. Gentleman has just alluded to a fascinating philosophical point. While the impact of a large company will obviously be greater globally than that of a small company such as a corner shop, surely the principles of being responsible are exactly the same.

Jonathan Djanogly: Yes. One could apply the elephant test to a company’s attitude to CSR, but that cannot be done with enlightened shareholder value in the way that the Government propose, as it needs to be defined in the Bill. I have said why I think that that is not desirable. To the extent that it is to be done, we think that there are problems in making it work.
I was pleased that the Minister emphasised that enlightened shareholder value does not extend common law duties, and it was good to have that put on the record, but that does not make the relevant issues any less relevant or important. I agree with that.
The Minister’s attempt to throw up an Aunt Sally that somehow shows that we do not like CSR was pretty weak. The Conservative party has championed a proposal for dealing with climate change that is much more serious than the Government’s suggestion, and we do not propose to use non-specific company law. Our proposals are in our energy review. We believe that championing renewable, carbon-neutral energy sources is the way to make a real difference. Equally, a company law review is not the forum in which to debate climate change policy. If it were, we could spend the next month debating the environment and ignoring all the other common law duties.
The hon. Member for Liverpool, Riverside (Mrs. Ellman) showed where the Government are coming from when she asked whether the good intentions shown by all hon. Members would not be toothless without regulation. What we have here is the eternal cry of the regulator and, dare I say it, the socialist. Perhaps we have moved on from that. Yes, the Government have a role in guiding, in praising good CSR and in castigating bad practice, but, as the Minister herself said, general regulation will not necessarily improve the situation. We maintain that it could make matters worse. Regulation, where required, should be specific, but that is not the case in this situation.
It is worth mentioning the probing amendment tabled by my hon. Friend the Member for Grantham and Stamford. As fascinated as I was by the law according to him, I must say that we do not agree with his amendment, although I appreciate that it is probing. However, I am pleased that he tabled it, because it allows me to reiterate that the Conservative party values the environment as an issue.
While we have problems with the list as a whole, both conceptually and legally, we certainly have no wish to single out the duty that relates to the environment for deletion from the list of directors’ duties. To the contrary—if there must be a list, we are happy that the environment has been included. We remain puzzled, however, as to why so many other duties and responsibilities have not made the list, and are concerned about the potential for confusion that will result from the measure.
The Government have chosen six responsibilities for a director while ignoring hundreds of others. We have been advised that that approach will lead to great uncertainties and confusion as companies and lawyers try to work out which duties rank above each other or are more important. Do they all carry the same weight? The Minister strongly maintained that they do, and we will reconsider what she said. If that is the case, why were only those six chosen? If the codified responsibilities are more important than the uncodified, why is that?
Overly restrictive general regulation is not an example that we should be setting. UK companies that have been spurred on by shareholders and consumers are already beginning to set an example to their competitors on corporate responsibility, and we support that approach over heavy-handed interference. We shall reserve our position on the clause as we move towards consideration on Report because we wish to review the Minister’s words and the sheer weight of amendments has made an immediate response difficult. We also wish to consult further in the summer months. In the meantime, I beg to ask leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Clause 158 ordered to stand part of the Bill.

Clause 159

Duty to exercise indpendent judgment

Question proposed, That the clause stand part of the Bill.

Jonathan Djanogly: We move on after a long interlude on clause 158.
Clause 159 introduces to statute a duty that directors must exercise their powers independently and must not fetter the future exercise of their discretion unless acting in accordance with an agreement made with the company or in a way authorised by its constitution. Although clearly based on the current legal position, the wording has been altered significantly.
The provision was debated in the Lords when Lord Freeman moved a probing amendment to omit subsection (1). He said first that directors might be restricted in relying on fellow directors or external advisers, particularly non-executive directors who as common practice rely on advice, reports and recommendations given by others. He also said that nominee directors appointed by a corporate shareholder would, for obvious reasons, be unable to exercise independent judgment.
Lord Goldsmith responded that a director can take advice or copy someone else’s judgment, but the judgment that he exercises must be his own. He said that in some circumstances directors might breach their duties if they failed to take appropriate advice, but that slavish reliance would be unacceptable. In relation to nominee directors, case law supports the notion that they are required to exercise their best judgment in the interests of the company.
The Law Society’s parliamentary brief recommends leaving out the clause. It points out that the law in this area is developing and that the clause casts doubt on whether a director can rely on other directors or external advisers. Furthermore, it states that it is unclear what, if anything, the clause adds to the duties in clause 158. The CBI and a briefing note received from City solicitors Norton Rose point out that it is unclear whether the duty in clause 159 precludes a director from delegating functions to committees of a board. However, guidance from the Department of Trade and Industry seems to indicate that that would be permitted if allowed by a company’s constitution. Will the Minister explain how the Government came to that point of view?
Our concern is that a non-independent, non-executive director—for instance, a nominee director of a large shareholder—might fear that under the clause the duty to exercise independent judgment could be used to make their position more difficult. What can the Minister say to put such people’s minds at rest?
Finally, clause 159(2) notes that a director will not be in breach if he acts in a way authorised by his company’s constitution. On that basis, is it not the case that if a company’s articles said that a non-independent nominee director could act in accordance with the instructions of the nominating shareholder, or at least that he could have full regard to such instructions, that would end or reduce the duty set out in the clause, which presumably overrides the existing common law duty?

Mike O'Brien: The duty is about directors having to make their own judgments and not follow blindly the views of another without considering the interests of the company. In other words, the role of a director is to exercise independent judgment for the benefit of the company. That is what we expect directors to do. It is surely right that they should have that obligation, given that it is what they were appointed to do. If the clause were deleted as the amendment proposes, the duty would remain an uncodified equitable principle.

Jonathan Djanogly: To clarify, there is no amendment. I have put to the Solicitor-General a few probing questions for the stand part debate.

John Bercow: We are discussing clause 159. I think we are all conscious of that.

Jonathan Djanogly: The Solicitor-General referred to an amendment.

Mike O'Brien: I did refer to an amendment, and I have a note here on it, but I accept that the hon. Gentleman did not move one, so let us deal with the stand part debate.
The aim is to codify the law so that it is easily accessible to directors. The duty does not mean that a director cannot take proper advice from a lawyer, an accountant or anyone else he feels it appropriate to take advice from. He can take such advice from others and rely on it if he chooses to do so. Although he is exercising an independent judgment, that does not mean that he must be independent himself. He might have an interest in the matter, and conflicts of interest are dealt with in clauses 161 to 163. It is only the director’s judgment that must be independent, in the sense that it must be his judgment, not that of someone else.
The director may even adopt another’s judgment, provided that he believes that it is in the best interests of the company—in other words, that his judgment is that someone else’s judgment is in the best interests of the company.
Subsection (2)(a) reflects the current law in Cabra Estates plc and Fulham football club. Under subsection (2)(b), companies can authorise the fettering of the discretion through their constitution, if they choose to do so.
The statutory statement does not affect the current law that a delegate may not delegate unless he has been given the power to do so. Provided that a company gives a director a power to delegate, he may choose to exercise that power, but it is for the company itself to give him it. Directors may delegate the performance of their functions and the exercise of their powers if the company has given them the power to delegate. They will know whether they have that power, because it may be conferred expressly on them by the company’s constitution or by shareholders’ resolution, or it may be implied, provided that it is clearly implied.
Article 15 of the draft model articles for companies limited by shares, which were published in the March 2005 White Paper, provides that, with certain exceptions, directors may delegate any of their functions to any person they think fit. The Law Commission’s draft summary of the general duties did not deal with delegation. The company law review included the principle in its draft statement because it wanted to emphasise the fact that directors may not subordinate their judgment to that of another by delegating their functions unless such delegation is authorised by the constitution. We have concluded that the principle does not belong in the statutory statement. How the directors distribute their functions among themselves on a day-to-day basis is part of how they organise their affairs in accordance with the constitution.
The question arises as to how the duty adds to clause 158. It has been said that most of the fiduciary duties can be seen as aspects of one fundamental duty to act in good faith for the benefit of the company. Even if that is so, the conventional approach is further to classify the duties. That helps to show the range of the duties and the various ways in which they apply. The Law Commission and the company law review both considered that the statement of duties should include a separate reference to a requirement on a fiduciary not to fetter discretion, and we agree with that.
I was asked whether the Bill will change the law on nominee directors. The general duties do not prevent the appointment of nominee directors, who are appointed by a particular party to protect their interests. However, once appointed, the nominee director must be left free to exercise his best judgment in the interests of the company that he serves. The nominee director must ignore the interests and wishes of the person who appointed him, and we rely there on case law, including Scottish Co-operative Wholesale Society Ltd v. Meyer and Kuwait Asia Bank EC v. National Mutual Life Nominees Ltd. The statutory statement does not change that, but subsection (2)(b) will allow the status of the nominee director to be enshrined in the company’s constitution so that the nominee is able to follow the instructions of the person who appointed him without breaching that duty. The extent to which that is possible under the existing law was unclear, but we have now made it clear. However, even when a nominee follows instructions, he must still comply with all his other duties—there may well be other duties—such as a duty to act broadly in the interests of the company. I hope that that deals with the points raised by the hon. Gentleman and I hope that he will be able to support the clause.

Jonathan Djanogly: I thank the Solicitor-General for that helpful clarification.

Question put and agreed to.

Clause 159 ordered to stand part of the Bill.

Clause 160

Duty to exercise reasonable care, skill and diligence

Jonathan Djanogly: I beg to move amendment No. 272, in clause 160, page 70, line 34, leave out subsection (2).
The clause is a new provision and codifies the duty to exercise reasonable care, skill and diligence, which is to be judged by both a subjective and an objective standard. Lord Freeman moved a probing amendment in the other place to leave out subsection (2) so as to remove the objective/subjective test introduced by section 214 of the Insolvency Act 1986 as it adds a level of severity. The extent of a director’s duties, failings and liabilities should be determined on the particular facts of a case. This also raises the issue of the standard on which a director who is also a professional should be judged. Lord Goldsmith responded that subsection (2) is essential to establish what the standard of care owed by director to a company is. He said that the wording of subsection (2) is clear and that the duty of care will take into account the general knowledge, skills and experience of that director. He also said, in response to a Law Society query, that if a director is a professional but is not employed by the company in his professional capacity, he would not be expected to bring his professional expertise to the directorship. Will the Solicitor-General provide the grounds on which the Attorney-General made that statement?
The City firm, Linklaters, pointed out in a report that the provision follows recent case law, which has adopted the twofold duty that I discussed. However, adopting such a test, which was originally introduced in an insolvency context, may cause concern if applied in all situations and for all types of company. Directors of smaller companies, particularly those established for non-commercial purposes, would find that standard particularly onerous. Furthermore, non-executive directors are to be judged by the same standard as executive directors. Norton Rose’s report pointed out that non-executive directors will often have more experience than their executive counterparts. Does the Solicitor-General consider that the impact of the clause could be to put directors off serving as directors?

Mike O'Brien: Those who take it on themselves to act on behalf of or to advise others may have a duty to exercise care and skill in doing so. The clause is concerned with the application of that duty to company directors. The duty of care that a director owes to his company is an important area of law and has evolved significantly over the past 20 years. Historically, there was a very low standard of care and a director was not required to exhibit in the performance of his duties a greater degree of skill than might reasonably be expected from a person of his knowledge and experience. That was in re City Equitable Fire Insurance Company.
Some 19th century cases remain well known, in part because their outcome now strikes us as out of step with modern expectations. For example, in 1892 the court held that the Marquis of Bute, who was appointed a bank president at the age of six months and attended only one meeting of the board in 39 years, had not breached his duty of care. That was in re Cardiff Savings Bank. Standards have changed and the law has developed significantly. The Law Commission considered that we should ensure that our current standard is the right one and that that should be set out in statute. The company law review agreed, as do we.
The duty requires a director to exercise reasonable care, skill and diligence. Subsection (2) explains what that means. It
“means the care, skill and diligence that would be exercised by a reasonably diligent person.”
The duty is based on
“the general knowledge, skill and experience that may reasonably be expected of a person carrying out the”
same functions as the director in that particular company, and the actual
“general knowledge, skill and experience that the director has.”
The former is the minimum standard required by the duty on all directors. If the particular director possesses greater general knowledge, skill or experience than that which may reasonably be expected of a director carrying out the same functions as him in that company, he will have to meet a higher standard of care, skill and diligence appropriate to his general knowledge, skill and experience.
That deals with executive or non-executive directors who might have different levels of knowledge and skill, where they are expected to exercise that. If the director happens to possess less knowledge, skill and experience than that which would be reasonably expected of a director carrying out the same functions as him in that company, he would nevertheless be required to meet the minimum standard set by the objective test in subsection (2)(a), which was referred to also in the case of re DKG Contractors Ltd.
The standard of care takes account of the differences between the responsibilities of directors of different types and in different situations—for example, the chairman, chief executive, finance director, chairman of the audit committee or an independent non-executive director. The objective element of the test looks at the general knowledge, skill and experience that may be reasonably expected of a person carrying out the same functions as the director in that company, enabling the court to take account of all such differences.
In a sense, I have dealt already with non-executive directors. The duty takes into account an individual’s general knowledge, skill and experience that they are expected to deploy. However, the duty does not require the director to use all his skills. For example, a lawyer on the board of a company is not expected to second guess the lawyers advising the company, but to use his general knowledge, skill and ability to look at things. It might be that, as a result of those skills, he will have some questions about a decision with a legal impact and for which legal advice has been obtained. However, he is not expected to go off and spend a week researching the subject that a barrister has been employed to research in order to see if he agrees with it. That is not the required level of diligence. So it is about exercising reasonable care, skill and diligence. The non-executive director will use some of his experience and skill in his involvement, but he is not expected to have all the knowledge about the internal workings of the business that, say, an executive director is, and so the law will take account of people’s different perspectives.
The clause provides sufficient guidance to directors so that they can exercise their roles with a degree of certainty about what is required of them. I hope therefore that the hon. Gentleman will feel able to support our position.

Jonathan Djanogly: The Solicitor-General explained the test in section 214 of the Insolvency Act 1986 very well, and I appreciate that we have moved on from the Marquis of Bute case. However, I am still not quite sure why we have to go to the level of toughness in section 214.
Tom Mackay, chair of the legal committee of the Quoted Companies Alliance, said that that duty
“could have dire consequences in that directors, especially those of FTSE 100 companies, would be reluctant to become a director of a smaller company. Liabilities will arise as they will be measured by a higher standard of care, skill and diligence”.
Clearly, a number of people are concerned about that, and we will have another look at the clause over the recess, but for the moment, I beg to ask leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Clause 160 ordered to stand part of the Bill.
[Continued in column 605]